MasterCoin (currently known as Omni) raised nearly 5000 BTC in the first-ever cryptocurrency fundraising, which took place in summer 2013. A year later, Ethereum raised over 30 000 BTC in a crowdsale. Two more years later, Waves blockchain platform managed to raise nearly 30 000 BTC. The same year, The DAO gathered a record-breaking amount of cryptocurrency investments. This fund-raising campaign was the world’s most successful – over 12 million ETH. The total amount of investments raised by The DAO, Ethereum and Waves is nearly 195 million dollars.
One would think, it’s a fair amount of crypto cash, and it’s a serious business. However, numerous ICOs and crowd sales, same as three years before, look like a sale of corporate rights of a company that doesn’t actually exist, with no term sheet where a party undertakes to incorporate a company. In other words, there’s no legal entity, no obligations to incorporate one and no shares. What we have is a landing page, a thread on bitcointalk and a nice infographics with a smart-looking roadmap. Oh, and also a short promo of a project with a funny voicework.
Legalization of cryptocurrency projects and fundraising procedures appeared to be the way out in this seemingly deadlock situation.
FirstBlood, ICONOMI, and SingularDTV (raised 7,5 million dollars for only 15 minutes in a crowdsale) are the projects that managed to handle crowd sales as legitimately as possible: they incorporated legal entities and published their ICO rules, and the users had to agree to follow such rules by using the websites, registering or buying the tokens.
ICO and Crowdsale: Legal Status
However, ICOs and crowd sales are neither legal, nor illegal ways of fundraising. No country in the world managed to specify their legal status, procedure, and requirements to companies willing to raise funds by using these tools. There are no informal ICO and crowdsale procedures available on web-sites and favoured by the major part of crypto society.
In fact, cryptocurrency activities are carried out in the informal economy, i.e. System D, and the legal status of cryptocurrencies remains in the shadow zone. In addition, it’s hard to determine the legal nature of relationships arising in any ICO or crowdsale, since they can hardly be referred to as traditional funding. It’s also hard to tell whether or not they can be identified as aleatory (hazardous). Obviously, this is the case when technologies develop faster than laws.
At the same time, such relationships are definitely based on the reputation of people who stand behind cryptocurrency startups and the trust of users’ (prospective investors). One of the most vivid examples is a crowdsale on Kuna cryptocurrency exchange, which succeeded only due to the reputation of its founder Michael Chobanian.
Similar features to IPO and crowdfunding (crowdinvesting)
Generally speaking, ICOs are similar to IPOs (Initial Public Offering), while crowdsale is similar to crowdfunding (crowdinvesting).
The difference is, investors acquire real shares in IPOs, while in ICOs, they acquire crypto shares, i.e. cryptographic tokens, which entitle investors to the part of the company’s revenue, but they are not actual shares. Crowdfunding and crowdsale differ in a similar way.
In addition, unlike ICOs and crowd sales, IPOs and crowdfunding as a rule fall under national regulations.
For example, in the USA, the issuer willing to offer the shares during an IPO (it should be a company incorporated as a stock corporation) has to be included in the US Securities and Exchange Commission (SEC) registrar. The registration itself is complicated and time-consuming. At the same time, a company has to disclose loads of information, including its financial records. In addition, all exchanges have their own listing requirements. So, exchanges may specify the required number of shareholders, the company’s revenue in the last year, and the asset value.
In the USA, you can raise money through crowdfunding only by using the special fundraising web-sites or brokers. Both acquire the right to provide such services only after being registered with the SEC. There are restrictions concerning the amount of funding a company may get. In addition, issuers are required to disclose financial records and other information to investors and the SEC.
All these requirements make fundraising more complicated, but at the same time, they provide investors with warranties. It’s easier to raise funds in ICOs, but users have no warranties.
The question is whether cryptocurrency exchanges can raise funds using crowdinvesting instead of crowdsale and provide investors with warranties? The answer is “Yes, of course”. What is more, that’s exactly how Bitstamp, Kraken and ShapeShift raised their funds.
Actually, any cryptocurrency project can carry out a crowdinvesting campaign absolutely legitimately, and investors will acquire the shares of a real company. For example, you may use BnkToTheFuture. Not only the above-listed exchanges managed to raise funds using this platform, but also some other significant projects, such as Factom, MaidSafe, and Synereo.
Life hacks for prospective ICO participants
First of all, you have to be aware that the things you read in attractive posts on bitcointalk differ greatly from token sale agreements provisions. All too often, while going through a token sale agreement, you may find out that a company’s investors are not actually investors, and instead of providing corporate rights to ICO (crowdsale) participants, the tokens entitle them to join a project (or a system).
In most cases, token sale agreements expressly state that tokens are not shares or other securities. So, we have every right to call them funny money.
Moreover, as a rule, when you buy a token or just use a website, you acknowledge that you understand the meaning of cryptocurrency and blockchain and have enough expertise in order to participate in ICOs. In addition, you join cryptocurrency fundraising at your own risk and you waive any claims and hold the company harmless from any damages with regard to your investments.
Disclaimer of warranties and limitation of liability clauses are usually typed in CAPS. However, only a few crowdsale participants read them.
At first, it may seem that you may ignore reading the rules available on a website. But actually, you shouldn’t underestimate the importance of this document, since it’s a binding agreement for all parties.
What is more, this is the case where you have to be a real bookworm and challenge every wording, no matter how great it looks on a website or a social media profile. The thing is, the wordings of ICO rules and token sale agreements may differ greatly.
This is complicated, and in practice, prospective investors in cryptocurrency projects are as a rule not so eager to go through several pages of agreements. A good many of them even skip the White Paper and read only bitcointalk thread and description of the project and crowdsale available on the website.
However, you may choose to seek advice from audit companies or experts and check whether the project and the ICO are reliable. Cryptocurrency projects order turnkey crowd sales from the same companies and experts.
Finnaly, it is useful to remember about the indicators of a bona fide cryptocurrency fundraising:
(1) a company raising funds should be duly incorporated;
(2 )all the required rules and agreements are available on a company website as a public offer;
(3) there’s a ready working prototype;
(4) there’s a good WP and other documentation;
(5) escrow services is available; and
(6) people who stand behind a project have a solid reputation.